• Introduction: Market Cap to GDP Appears Pricey as Fast Growing Stocks are All the Rage
  • The Numbers Required to Resolve Market Cap to GDP are Anything but Pretty
  • How the Recent Rout Stacks Up vs. History
  • Is the Price of Perfection an IPO Storm on the Horizon?
  • Conclusion: When Markets Fall, Loss Makers Can be Lethal

Introduction: Market Cap to GDP Appears Pricey

In Kailash Capital’s last piece, Private vs. Public Markets we led out with a chart showing that despite a booming stock market over the last decade the funding gap for many pensions had not improved since the trough of the Great Financial Crisis. We cited McKinsey’s research which noted that a cause of this was that many pensions “…recognized significant losses at the time of the downturn [in equities during the crash] and did not reallocate with sufficient alacrity to take full advantage of the past decade’s bull-run.”

Warren Buffet discussed this phenomenon in a 2001 interview with Fortune Magazine in which he explained his very public view that markets were expensive in 1999. He noted “When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up, we weep. For most people, it’s the same way with everything in life they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”1

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Buffett went on to state that he never has “…the faintest idea what the stock market is going to do in the next six months, or the next year or the next two. But I think it is very easy to see what is likely to happen over the long term.”2 How did Buffett come to feel it was “very easy to see” what is likely to happen over the long run? Fortunately, he explained that he uses a simple method he felt very “fundamental” in nature of calculating “…the market value of all publicly traded securities as a percentage of the country’s business….” which he felt was “…probably the best single measure of where valuations stand at any given moment.” In this 2001 interview he followed that comment up with “…nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.” [Emphasis ours]

We have replicated the Buffett metric in Fig. 1. We would note that current valuations today are virtually identical to the period Buffett was commenting on during his 2001 interview with market Cap to GDP trading at 152%. One place the emerging mania is leaving behind is a collection of wonderful GARP stocks.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.



The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

January 1, 2019 |

Categories: White Papers

January 1, 2019

Categories: White Papers

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